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Missed Expectations: The Argentine Convertibility

  • Sebastian Galiani


  • Daniel Heymann
  • Mariano Tommasi

This paper studies the process that led to the Argentine crisis. The crisis is understood as a major disappointment of previous expectations, indicated by widespread insolvencies and abrupt declines in consumption. The analysis concentrates on the sequence of public and private decisions, and the varying perceptions and policy incentives that motivated them. In the nineties Argentina searched for a new growth trend. During much of the period, the behavior of agents seemed to be based on the anticipation that current and future incomes could sustain a value of domestic spending much higher than in the past. The government was motivated to reinforce those expectations, for signaling and political economy reasons. The convertibility monetary regime not only provided a very visible nominal anchor, but also operated as a basic framework for financial contracts, mostly denominated in dollars. Dollar contracting implicitly presumed that the dollar value of incomes would support the servicing of debts. Despite precautionary measures, the reliance on the sustainability of the real exchange rate increased over time. In the late nineties exports stopped rising and the foreign supply of credit tightened. Facing these contraints, the economy contracted and the solvency of the government was put into question. The financial system was vulnerable both in the event of devaluation and that of a (large) deflation-cum-adjustment. As was implicit in its design and management, convertibility proved to have very large exit costs.

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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 515.

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Length: 37 pages
Date of creation: 01 Nov 2002
Date of revision:
Handle: RePEc:wdi:papers:2002-515
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  1. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, June.
  2. Drazen, Allan & Masson, Paul R, 1994. "Credibility of Policies versus Credibility of Policymakers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 735-54, August.
  3. Lars Peter Hansen & Thomas J. Sargent, 2001. "Acknowledging Misspecification in Macroeconomic Theory," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 519-535, July.
  4. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc.
  5. Guidotti, Pablo E & Vegh, Carlos A, 1999. "Losing Credibility: The Stabilization Blues," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 23-51, February.
  6. Guillermo Calvo & Carlos A. Végh Gramont, 1991. "Exchange-Rate-Based Stabilization under Imperfect Credibility," IMF Working Papers 91/77, International Monetary Fund.
  7. Mariano Tommasi & Pablo T. Spiller, 2000. "The Institutional Foundations of Public Policy: A Transactions Approach with Application to Argentina," Working Papers 29, Universidad de San Andres, Departamento de Economia, revised May 2000.
  8. Eduardo Lora & Ugo Panizza, 2002. "Structural Reforms in Latin America under Scrutiny," Research Department Publications 4303, Inter-American Development Bank, Research Department.
  9. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
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